'One byelection swallow doesn't make a summer. These one-offs give voters a free kick at the regime of the day, without consequences. But this welcome win is a green shoot for Labour, as YouGov this week gave them a 7% lead at 43%, with Conservatives on 36% and the Lib Dems limping behind on 9%. That is Labour's highest lead since Gordon Brown's brief honeymoon in 2007, though many shudder at the memory of that fool's gold. There is certainly no hint of hubris in the Miliband camp.

Next up is the Barnsley Central byelection, the seat vacated by the disgraced Labour MP Eric Illsley. With an 11,000 majority, it will be no useful test of the state of the parties, but it will shine an interesting light on what is happening in local government. The leader of Barnsley council, Stephen Houghton, is among the most vociferous about the unfairness of the cuts, outraged at finding his 25% cuts mean he must lose 1,100 jobs, a fifth of his staff in a town with 19% unemployment already.

But it's no longer just Labour councils: a groundswell of fury also welled up among Tory and Lib Dem council leaders meeting this week at the Local Government Association, where many called for the head of Eric Pickles, the communities secretary. Lady Eaton, the LGA leader – a Tory – has broken cover forcefully about the impossible speed and depth of the cuts. She told me: "We were ready for cuts – but not to have them frontloaded like this, so redundancies can't be eased in with natural wastage. They don't seem to understand what it means."

What lit the fuse was the concerted attack on councils by Pickles and other ministers – blaming councils for inefficiency, claiming there is no need for any frontline cuts. "Councils should not be using residents as cash cows," said the housing minister, Grant Shapps. "If they cut chief executive pay, join backoffice services and cut out crazy non-jobs, they can protect frontline services."

The sheer dishonesty drives council leaders to incandescence. "They make it sound as if cutting executive pay could fill the black hole," Eaton protests. "That just alienates the public from their councils. Don't these ministers see the damage they do? We have already carried out £5.5bn of efficiency cuts since 2007. Don't kick us when we are the most efficient service." A mild woman, known for caution, this Conservative leader is now as outraged as Labour councillors.

But Labour has its own dilemmas ahead of next May's council elections. Up and down the country bitter Labour councillors in hard-pressed inner cities are obediently sacking staff and massacring support for old, young and disabled people. Campaigning to win back councils in May, Labour can only argue it will wield the scalpel with more finesse. Long gone are the bad old Derek Hatton days of rebellion against Westminster, when refusing to set legal budgets resulted in penalties that only made matters worse. But it is agonisingly painful for Labour to make unjust cuts and justify them to voters and unions.

Labour-run Manchester this week announced 2,000 job losses – 17% of its workforce – in all grades and departments, from street cleaners to social workers and backoffice staff. The council leader, Sir Richard Leese, protests that the city received one of the most unfair settlements, as Pickles drained money out of cities into affluent suburbs and shires. But Leese was a councillor back in the 80s and says: "We thought we could take on central government and win, but I learned you just can't."

The union Unite's immediate reaction to these job losses was a sabre-rattling press release "considering a consultative ballot for industrial action". But unions striking or working to rule against communities already suffering cuts seems utterly self-defeating. Why strike against a Labour council? Talking to Len McCluskey, the new Unite leader, he sounds rather more emollient. "It's an awkward dilemma," he says, "to take action against a Labour council when we have good industrial relations. But when push comes to shove, our members have the right to strike." Indeed, unions have a duty to defend those who, in this climate, may never work again once sacked. But it will do Labour nationally no good if the blame switches from government cuts to local strikers. Most unions are well aware of the danger.

Barnsley may prove to be the model for getting this right. Houghton has for many months been holding mass staff meetings, laying out the brutal facts and asking if they would prefer cuts in pay, terms and conditions in exchange for many fewer redundancies. Talking to both sides, it sounds as if he is on the verge of gaining their consent. Manchester is hoping for the same deal, opening all its books to the unions. What helps carry agreement through is the strong local sense of shared indignation, forging a campaign with Age Concern, children's charities, Citizens Advice and scores of organisations together struggling against the cuts tsunami rolling in from April. Eloquent in his indignation, Houghton spits teeth over what he must do to his children's services, care for the old, street cleaning, pothole repairs, parks and everything else.

As the local government bill makes its way through parliament this week claiming a spurious new "localism", council leaders are collating all the directives sent out from Pickles and others. Lambeth's leader, Steve Reed, has collected almost a diktat a day, more orders than "centralising" Labour ever gave. Some are remarkable for barefaced cheek, such as Ed Vaizey, the libraries minister, reminding cash-stricken councils of their legal duty to keep providing a "comprehensive and efficient service", with no money.

Or Pickles's guidance on how councils should run diamond jubilee celebrations. Or a directive on street signs. Or last week's letter from the Tory minister Bob Neill telling them how often to collect their bins, bossily demanding "a can-do approach to basic services".

The war of words between local and central government will get fiercer – and furious Tory and Lib Dem council leaders may yet see off the impudent dishonesty of Pickles before the year is out. Meanwhile the government will be praying that unions threatening strikes will draw blame and attention away from where it belongs: if wisdom prevails, Labour and the unions may step around that elephant trap.

• This article was amended on 16 January2011. In the original Bob Neill was described as a Liberal Democratminister. This has been corrected.